Proposed Extension for IFRS 16: How COVID-19 is Still Impacting Lease Accounting Standards

by Joe Fitzgerald

These are the considerations that financial professionals should keep in mind to ensure they are prepared for changes that may emerge due to COVID-19.

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As we move further into the new year, the pandemic continues to impact many businesses. To help companies adjust to the changing landscape, the International Accounting Standards Board (IASB) recently proposed an extension of the application period of the amendment to IFRS 16 to help lessees account for pandemic-related rent concessions.

The amendment that was originally issued in May 2020 allows rent concessions that reduce lease payments that are due on or before June 30, 2021. This new proposal (February 2021) is in favor of extending the relief by one year (June 30, 2022) to continue to help lessees account for COVID-19-related rent concessions. Additionally, this extension will potentially provide relief to payments that largely resulted in the consideration for the lease contract being substantially the same or less than the original consideration for the lease immediately before the concession was provided.

Most lessees will likely welcome the extra time if the proposed change is enacted. However, there are other considerations that financial professionals should keep in mind to ensure they are prepared for this change, and any others that may emerge due to COVID-19.

COVID’s impact on lease accounting

Companies with many leased items, including property, equipment, among other assets, are most likely to be significantly affected by the IFRS 16 leasing standard, which all firms adopted in 2019. This proposed extension references a specific practical expedient that IASB provided for dealing with abatements received due to COVID-19.

With both the IASB and FASB lease accounting standards, firms can elect how to treat COVID-related abatements under certain conditions – for example, there cannot be a significant increase in the obligations of the lessee or rights of the lessor. The primary difference between both sets of standards is timing. FASB considers the intent of the abatement, while IASB has determined that to qualify as a COVID abatement, the period abated must be prior to June 30, 2021 – or June 30, 2022, if the proposed changes go through.

Assessing future scenarios

As further concessions are made, they will need to be assessed independently of what has already occurred, because the leasing and lease accounting landscape will likely continue to shift. From an accounting perspective, all forms of rent relief because of the pandemic will – like any other changes – need to be tracked and evaluated under the new lease accounting standards, and financial professionals will need to consider if remeasurement is necessary.

To help financial professionals better predict future scenarios in a rather unpredictable environment, lease accounting solutions can be implemented to help them model hypothetical situations that could impact their balance sheet. Considering these scenarios can help firms assess whether any future abatements would meet the criteria for COVID-specific handling and would give companies a loose roadmap to prepare their reporting to try and stay ahead of any future changes that may arise.

As the pandemic’s impact is still being felt at companies across all industries, the International Accounting Standards Board is continuing to take note and adjust deadlines and clauses to meet the needs of financial reporting. With the new IFRS 16 potential delays to consider, companies can gather and prepare their assets now so if enacted, they will be ready to meet the requirements by the new deadline next year.

Joe Fitzgerald is SVP of Lease Market Strategy at Visual Lease.